Perma-Fix Environmental Services - Earnings Call - Q4 2015

Transcript

Speaker 0

Greetings, and welcome to the Perma Fix Environmental Year End twenty fifteen Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. A reminder, this conference is being recorded. I would like to turn the conference over to your host, Mr.

David Waldman with Crescendo Communications. Thank you. You may begin.

Speaker 1

Thank you, Matt. Good morning, everyone, and welcome to Perma Fix Environmental Services Fourth Quarter twenty fifteen Conference Call. On the call with us this morning are Doctor. Lou Senifani, CEO and Ben Naccaratto, Chief Financial Officer. The company issued a press release this morning containing fourth quarter and year end twenty fifteen financial results, which is also posted on the company's website.

If you have any questions after the call or would like additional information about the company, please contact Crescendo Communications at (212) 671-1021. I'd also like to remind everyone that certain statements contained within this conference call may contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements on this conference call other than a statement of historical fact are forward looking statements that are subject to known and unknown risks, uncertainties and other factors which could cause actual results and performance of the company to differ materially from such statements. These risks and uncertainties are detailed in the company's filings with The U. S.

Securities And Exchange Commission. The company makes no commitment to disclose any revisions to forward looking statements or any facts, events or circumstances after the date hereof that bear upon forward looking statements. I'd now like to turn

Speaker 2

the call over to Doctor.

Speaker 1

Lou Sefani. Please go ahead, Lou.

Speaker 2

Thank you, David, and welcome, everyone. Very pleased to report that we achieved $7,000,000 of adjusted EBITDA, which is at the top end of our guidance. It's almost double what we reported last year. And as we look forward, we're on track for another very strong year, stronger year in 'sixteen. As you know, we've been very focused on continuing the growth and improving the profitability of the company.

As we look to 2016, we see continued significant improvements in both the treatment and the service segments. Also, likelihood of entering some new exciting markets that we will discuss later in the call. I'd like to also point out that had it not been for our medical subsidiary, we would have shown positive income from continuing operations. But since we are the majority owner of Permafix Medical, we must consolidate the financials even though this entity is independently funded. We're making tremendous progress on our medical subsidiary, which I'll discuss in more detail later in the call, and Ben will give more color on the financial impact of our medical subsidiary.

Turning first to the Service segment. Happy to report revenue increased 43% in the fourth quarter to $5,500,000 from $4,400,000 from the same period last year. We see continued growth in our Service segment, which provides a very predictable revenue stream. Moreover, we see significant opportunities here as we continue to build our resume. At the same time, we are in a much stronger competitive position as the market continues to consolidate and weaker players have exited the market.

As an example of our recent success, we were selected by the Navy as a part of the winning team on the $240,000,000 5 year contract for environmental remediation services at various Navy installations. We are acting as a subcontractor on this award to CH Tulum Hill, the prime contractor of the project. CH Tulum Hill selected to work with Perma Fix through our close working relationship and the fact that we are uniquely qualified in terms of characterizing, remediating, surveying radioactive materially impacted sites. With our vast waste characterization and treatment knowledge and experience, we're able to provide a comprehensive solution for site environmental remediation projects, including turnkey radiological services from characterization through decommissioning, decontamination and final status survey. While we can't provide the specific dollar amount to permafix on this contract, suffice to say, in a typical contract like this, we anticipate about 15% to 20% of the total project award.

This is just another example of the many opportunities we see going forward in our service segment, which has continued to do better and better over the last year and a half. Within the Treatment segment, revenue declined in the fourth quarter compared to the same period last year, but this was due to, in large part, to the timing of certain large waste treatment projects that were pushed out to later this year. And we expect to receive these shipments in the second quarter, which should boost our treatment sales beginning in the second quarter, and we expect a very strong remainder of the year in treatment. Because of that, though, I would point out we do expect some weakness in the first quarter due to these delays. Nevertheless, we have improved visibility, primarily as it relates to government spending and commitments by the government in terms of waste shipments that they anticipate sending us over the next year.

Thus, we anticipate solid growth in both our Treatment and Service segments in 2016. At the same time, the opportunities outside DOE continues to be encouraging as we continue to focus on commercial and international that will help diversify our revenue. In addition to our low level mixed waste treatment business, which we anticipate will grow in 2016, we see emerging opportunities in the high level area, which represent even larger potential market opportunity. For all of you who have been following us for years, you know this has been one of our and my top priorities is moving into high level waste streams where there are no available treatment options. The market for these waste streams dwarf anything we've done in the past.

Importantly, we believe we have the technology, permits and facilities in place to treat a variety of high level waste streams. Turning now to the medical side of business. We continue to make progress on the regulatory front as well as putting the company on a more solid footing from a capital markets perspective. We are considering a variety of options that will bolster the strength of the subsidiary, both strategic and capital market options. We now have the required management and regulatory expertise in place and the feedback from within the industry from both distributor and end user has been extremely positive.

We are in a believe we're in a position to dominate this $1,000,000,000 market as our process is lower cost, does not use government subsidized weapons grade materials and can be readily deployed in standard research and commercial reactors worldwide, thereby solving the global supply chain concerns for this critical medical isotope. So to wrap up, we remain very confident in the outlook for 2016. In 2015, we saw adjusted EBITDA nearly double. For 'sixteen, we anticipate continued growth in both treatment and services and with the neat luck should make headway in treating high level waste streams, which could be a true game changer for our business. At this point for 'sixteen, as I said, we'll improve on 'fifteen, and it will be much better, but we will provide more detailed guidance on our first quarter earnings call.

I'd like to now turn the call over to Ben, who will go into more detail on the numbers, and then I'll be back to answer your questions at the conclusion of the formal remarks. Ben? Thank you, Luke. I'll begin with revenue. Our total revenue from continuing operations for the fourth quarter was $15,100,000 compared to $17,000,000 in the 2014, a decrease of approximately 1,800,000.0 or 10.8%.

Our total revenue for the year ending December 3135, increased by $5,300,000 or 9.3%. Our Service segment increased revenue by 1,100,000.0 compared to 2014, but that was offset by a drop in our Treatment revenue of $2,900,000 Our Service segment continued to show modest growth in the fourth quarter when compared with prior year, and we continue to win our share of the smaller contract. For the year ended 2015, our Service segment increased by $6,300,000 or 43% compared to 14. Now this difference includes approximately $2,000,000 of revenue in 2014 that our engineering group had, which we sold in 2014. Excluding this loss, our service segment actually increased by approximately $8,300,000 or 66%.

Our Treatment revenue did decrease, as I mentioned, by 2,900,000.0 or percent $2,900,000 or 23.5% in the fourth quarter, and this was from reduced volume. The reduction was a result of, as Lou mentioned, a few delays in some pretty sizable shipments, which were only delayed and we are expecting them in the 2016. For the entire year, Treatment Segment was down $1,000,000 or 2.4% as again this impact of these shipment delays resulted in a shortfall against prior year. Turning to our cost

Speaker 1

of goods sold. Our total cost of

Speaker 2

sales for the fourth quarter were CAD11.2 million compared to CAD12.3 million for the same period last year. Our cost of sales from our Treatment Segment decreased by CAD1.5 million or 17.7% from the 2014. Again, lower revenue for the quarter resulted in lower variable costs of approximately CAD1.1 million, but we also saw reduced fixed costs at our facilities of approximately CAD438000. Our Service segment cost of sales increased by CAD440000 or 11.5%. This cost increase was related to the increased variable costs from higher revenue with very little increase in our fixed costs.

Our cost of sales for 2015 was higher than the prior year by $2,900,000 or 6.4%, and variable cost increases in Service segment related to increased revenue offset reduced costs that we saw from the Treatment segment, which was again, associated with lower revenue and lower fixed facility costs. Turning to gross profit. For the quarter, our gross profit was $3,900,000 or 25.7% of revenue compared to prior year $4,700,000 or 27.6% of revenue. Our gross profit from the Service segment increased $676,000 as the increased project revenue and improved gross margins contributed to the improvement. In the Treatment segment, gross profit was down 1,500,000 due to the revenue shortfall, but offset by improved revenue mix and lower facility costs.

For the year, our gross profit improved by $2,400,000 versus prior year as both segments improved compared to the prior year with Service segment improving by 2,000,000 Our G and A costs for the quarter were $2,300,000 or 15.4%, down from $3,100,000 or 18% of revenue last year. Improvements related to bad debt recoveries were partially offset by higher bid related marketing and administrative expenses. For the twelve months ended December 3135, our G and A costs were CAD11 million or 17.6% of revenue, which was down about CAD1 million from the $12,000,000 or 20.9% of revenue from prior year. Income from our continuing operations for the quarter was $259,000 compared to 7 and 41,000 in the prior year. Increased spending on research and development of 427,000 made up most of this reduction with the majority of the increase related to our development stage medical business.

Income from our continuing operations for the fiscal year twenty fifteen improved over prior year by $3,100,000 despite an increase in our research and development spending of $1,400,000 again related to our R and D our development stage medical business. Our income applicable to common shareholders for the quarter was $97,000 compared to last year's income of 875,000 For the year, the loss applicable to common shareholders was $1,100,000 compared to a loss in the prior year of 1,200,000.0 And as we mentioned earlier, consolidating our results from our Development Stage Medical segment was the main reason for the losses as the net income to our loss the net impact to our loss from this segment was $1,200,000 and $680,000 for 2015 and 'fourteen, respectively. Our income per share for the quarter was $01 compared to income per share of $08 last year. For the year, our loss per share was $09 compared to a loss per share of $0.11 in the prior year. Our adjusted EBITDA from continuing operations, as defined in this morning's press release, for the quarter was $2,500,000 consistent with last year's $2,500,000 in the fourth quarter of 'fourteen.

For the year, our adjusted EBITDA came in at $7,000,000 compared to $3,700,000 in 2014, an increase of 87.6%. Turning to our balance sheet. Our total cash and cash equivalents decreased by $2,200,000 Our cash required by our discontinued operations and net cash used in our Medical segment were the main reasons for this drop. Total current receivables were down $1,200,000 primarily due to the impact of the delayed shipments in our Treatment segment in the fourth quarter. Other current assets increased approximately $1,000,000 related to facility related prepayment expenses.

Our current liabilities from continuing operations were down $3,600,000 mostly due to our lower unearned revenue and waste backlog. Our backlog was $4,700,000 at year end 'fifteen compared to $9,200,000 at the end of 'fourteen. Our current liabilities from discontinued ops decreased $1,600,000 primarily from paying down payables related to our 2013 facility fire at our Georgia facility. Our total debt is at $10,000,000 at year end. Our lender, PNC Bank, making up $9,000,000 of that debt.

We also had working capital of $3,100,000 at year end, up considerably from $372,000 at the 2014. And finally, I'll give you some cash flow activity for the year. Our cash provided by continuing operations was 1,700,000.0 Our cash used by discontinued ops was $2,900,000 Cash used by investing activities was $492,000 consisting of capital spending of $6.23 and reduced by proceeds from some small asset sales and escrow receipts from our 2014 sale of our engineering firm. Cash used in financing was 490,000 consisting of debt payments of $3,800,000 and offset by equity raised by our medical company of approximately $1,000,000 and an increase in our revolver debt of 2,300,000.0 With that, operator, I'll now turn the call over to questions.

Speaker 0

Thank you. We will now be conducting a question and answer session. I

Speaker 3

wanted to know I was very happy with the services number, and I guess that's a better harbinger of things come than the volatility on the waste on the actual waste numbers. Do you see that business continuing to strengthen? As part of the new agreements, are the services revenues going to increase? And along with that, also the gross and net margins on the services side?

Speaker 2

Yes. I'll give you an overall view first is we've continued to win a lot of smaller contracts or unannounceable contracts. And so that group continues to do well and is growing. And we've got a fairly full pipeline right now in terms of projects that we're bidding on. So we expect to see continued strong growth in that group over the next year.

And with that comes improved margins.

Speaker 3

With the unannounceable contracts and the announced contract that you recently announced the announced one, Are you able to have visibility for this year if you why didn't you put out

Speaker 2

a you could have put out

Speaker 3

a forecast for baseline or approximate baseline. Even though you know certain things haven't hit yet, it seems like you've got enough contracted volume to say that 2016 is going to be a year of growth for the company.

Speaker 2

Well, we I thought we did. We said we see 'sixteen growing. We give actual numbers at this early stage and with the lumpiness of the waste side, we'd like to get into the first quarter at least past the first quarter and then be able to talk about the overall because the waste side has such a dramatic impact on the profitability of the company. Sure. Right now, as from standing orders, It looks very good for '15.

Speaker 3

Okay. And so that we probably anticipate the growth rate to be better than 15 is what I would expect. And then also, just one last question having to do with Farm

Speaker 4

and Fix Medical and and the

Speaker 3

progress that's been made there. You know, you've been putting a lot of money into in into Farm and Fix Medical. I guess your your expectation is that can continue for for another year or so and when do we see the value appearing for those shareholders? I know you have a lot going on there.

Speaker 2

We have discussed it as well previously. So We have a lot going on, and it will continue to be a, basically, a cash drain for at least a year and a half, two years. So that will we continue to see that, but it will also be funded by itself. So yep. Thanks a lot,

Speaker 0

And our next question comes from Sam Rebotsky from SER Asset Management.

Speaker 2

This I want to bring up this interesting development where Curion was acquired by French giant, Viola, for a $350,000,000 to $360,000,000 valuation. I'd like you to address how your treatment they're working on Fukushima. I'd like to address how your treatment differs from theirs. Is there any patents that you have that may infringe on yours or vice versa? And is it of value to set up a committee to explore any type of potential transaction with other companies based on this valuation where Perma Fix in this area has such a low valuation?

Well, it's been an interesting couple of months in the industry. We've seen two very dramatic events. One has been Veolia making an offer for Curion at about four, five times revenue. And and, basically, Curion has two things. One is they have water treatment contracts at Fukushima where they've done very well.

It's basically using technology that is basically nonproprietary. And then then they have a vitrification technology that has contributed very little to their revenue and then a service group that does basically service work. So when and then the second has been Energy Solutions has made a tender offer for waste control specialists, the other landfill in the industry, is about a very similar valuation, about $400,000,000 and that's probably 10x their revenue. So you're seeing valuations right now, and you're seeing the industry going through some very dramatic consolidation with some major players. And we think that will continue, and we think you'll see valuations continuing to stay up there.

So as we look at it, we were I think it's going to be a very interesting time for the industry as we go through these consolidations. I think we're in a very good spot. We probably have some of the best assets in the industry in terms of value. And, you know, I've I've said this over and over just or we could take almost any one of our facilities, and it it would have tremendous value in terms of replacement value and also in terms of the opportunities that are now exist out there. So we're very excited about the industry, and we think there's some great opportunity here.

As for a committee that you mentioned, our Board has a strategic committee that is constantly exploring what the best options are for the company in terms of from a strategic point of view. I assume we haven't had an offer. And is it worthy to hire an investment banker to speed up the process based on the fact there is a significant interest now and to sort of get an appropriate valuation for Perma Fix for this As part of the I said, the Board has a strategic committee, and it has involved bankers over the last several years under several times and continue to look for ways to explore various options. That's been going on fairly constantly, so through that strategic committee. Okay.

Let me ask you something on this. You say that the deferred contract, which that's going to be in the first quarter, it's March 22, the quarter ends March 31. How much the dollar amount that was deferred that's going to be in this first quarter? Most of it is going to be received in April.

Speaker 5

In April?

Speaker 2

That's we were kind of careful to make sure it was in the second half of the year or in the second quarter, we said we would be received in 'sixteen. So first quarter is going to be light because a lot of this stuff is all scheduled for April. And but then it's going to get pretty aggressive Ben, are we able to quantify the amount of this deferral for the second quarter? It was actually a few shipments in the probably a handful of shipments all worth, I'll just say, $1,000,000 a shipment kind of thing.

It was pretty kind it of caved the last quarter a little bit on the treatment side. What we've seen in the business, what is happening is that one, DOE's budget has improved. And I probably have said this in the past, but one of the effects of an improving budget is they go through a reprogramming process, which actually starts delaying things. But as we sit today, we have several sites that now are are in, I guess, you'd say, in trouble under their consent decrees because they've delayed shipments, and they are backing up. And they're so we expect a very good year this year because of the the requirements they have to for the primes to get their get their fee and meet and for the Department of Energy to meet its goals.

So what what we see coming is pretty significant for the year. Okay. Now the Navy contract, does that have to be funded? And when is that supposed to begin? It's already started.

And no, it's been funded, and the money is there. And we're starting to populate that as we speak. So revenue is being hit in this March or in the next No, it will start probably the middle of the year here where we'll actually recognize the revenue, start recognizing revenue.

Speaker 0

Next question comes from Bill Chapman from Morgan Stanley. Please go ahead.

Speaker 4

Guys, good morning.

Speaker 2

Good morning, Bill. Hello.

Speaker 4

I've come across several articles at Northwest Complications where there's a more and more uproar about the hampers and delays on treating that high level treatment. And these folks are talking about possibly getting some of that work back, I presume, when you mentioned high level treatment.

Speaker 2

Well, you know, we're our Hanford and our Richmond facility is is and are one of our main high activity facilities. It's the facility that can take true waste, and it's a facility that has the licenses and permits to take fairly high activity materials.

Speaker 0

Mhmm.

Speaker 2

So we see great opportunities there. And as you know, I've always said at the Hanford operation, there is a tremendous amount of waste there that needs treatment. We have the technologies where I've talked about we can provide a alternative there and a supplement to the waste treatment plant that's being built. And we're we're continuing to pursue those. And and I'm as optimistic as I've ever been that we could see some act some movement here in the very near future.

And it was you know, I I I compare it to how it worked with TruWaste. And if you go back in our history and look at the announcements, we we hardly ever said we got a contract to treat TruWaste. What what really happens in those cases is it builds up they they give you a bottle, then they give you a truckload, then they give you a train load. And and during those periods, it's it's hard sometimes to even announce what's going on, but they occur very gradually and somewhat under the radar. So what what I think might happen is very similar to what happened with the TruWaste.

We, one day, started treating TruWaste, and next thing you know, today, it's one of our biggest revenue streams coming into our facilities in Richland. So very optimistic. We'll continue to move in higher activity materials and hopefully see some progress here in the very near future.

Speaker 4

Okay. There's

Speaker 2

a right now, we see great opportunities out at the Hanford

Speaker 4

site. Okay. And is that cleanup site now I know it's a substantial amount of cleanup work. Is this a project that would take years and years or decades to clean up? Or just give me an idea about

Speaker 2

Well, they situation is there. I I guess I would just give you the latest forecast by DOE that they're not even be able to start the, electrification plant till 2038. So you can imagine the opportunities that are there to provide some backup services. So right right now, you're looking at, yes, decades of work once you start.

Speaker 4

Okay. Let me ask you on the on the tech 99. You mentioned you're gonna have expenses going out year and a half to two years. And but you're talking to partners about starting to have them do more of the work. Is is that taking that into account?

You're you're still be sharing expenses

Speaker 2

if you still work with it? Remember how it works is that it's a freestanding subsidiary, but we own over 50%, and we'll continue to own over 50% through the near future. And as long as we do that, we must consolidate their numbers, which will always be losses. So that's why we've tried to do the adjusted EBITDA so that you really can see through what our number is and how well our base business is doing so that it takes that medical expense out of the number. So that's why we've tried to do the adjusted EBITDA that gives everybody a better view Yeah.

Okay. Where we're going and and how we're doing.

Speaker 4

Okay. Are you still testing it out to complete the whatever requirements you have to come up with on a filing the with the with the Fed?

Speaker 2

Yeah. Where where the where the company is today is it is much more in the collecting of data stage for the FDA. We have verified the process. We're very comfortable that we have a process that produces quantities of TEK99 that can be used commercially. And so now it's a case of going through the various various steps to to collect data that is would be acceptable to the FDA under FDA standards.

It's so it's a process that's somewhat, I guess, I'd call it boring because you're basically doing very detailed tests for the kind of data the FDA needs. It's hard to talk about exactly, you know, the kind of progress we're making. Everything is track, and we're we're moving forward.

Speaker 4

Okay. One last question on developing a partnership with the company that's in this business. Are you hoping to have some kind of arrangement by, let's say, this summer?

Speaker 2

Well, it's possible. We're talking to a variety of strategics right now, and there's a lot of interest, as I've said. Whether we can get to a partnership or not at this point, I'm I hope so and optimistic, but hard to guarantee it at this point.

Speaker 4

Okay. Well, thanks for an update. It's frustrating. We're getting the the, you know, the cost is penalizing our earnings. We're not getting any kind of evaluation premium for what you have there.

So, hopefully, something can change on that, and the partnership will probably be be that factor.

Speaker 2

Well, we're we're optimistic with as it's developing here that that hopefully we'll see a better valuation on the medical side, which will help Permafix in the end. Right now, we we think it's totally unrealistic, but it's a very illiquid market for it in Poland at the moment, and that's one of our main focuses, how to improve that liquidity.

Speaker 4

Okay. Well, thank you very much, guys. Our

Speaker 0

next question comes from Doug Dyer from USU Department of Energy. Please go ahead.

Speaker 5

I have two parts to my question. First, you've mentioned that you have the ability to treat the high level waste. What is your capacity? Do you have capacity to handle maybe your expectation? And second of all, with regard to the waste that's at Hanford, what percentage of that waste can you treat?

Speaker 2

I'll give you sort of my answer to that is that the waste treatment, we could treat fairly significant volumes very quickly. We could probably, as we see it today, pretty much take because the the the you've got a 150 tanks of waste, and they're all slightly different. As we looked at those tanks from an activity point of view and a constituent point of view, there's a large majority of them we can take today. And pretty much, I won't quite say as is. We would have to do some pretreatment prior to taking them, which would be not real difficult.

And but if you do that simple pretreatment I hate to give you a number because it's we could probably take 70% of the volume with almost no capital, maybe a million dollars or so just to beef up our radiation protection program or so. So so there's a very significant amount of the waste we we could take and treat with some fairly simple pretreatment that's commercially available before it would come to our facility to and and that's the kind of thing we'd see trying to demonstrate to DOE in the near future here.

Speaker 5

I guess I've always had difficulty understanding why there's such a big urgency to do this and that there is urgency to treat it, but you've got the facilities there. It just seemed like it's such an easy thing to be able to get this up and running. What has been the disconnect? Why hasn't this been able to get started?

Speaker 2

Well, I I think the disconnect has been they've been very focused on a path forward, which which was the treatment plan and getting it up and running. Because of the the problems with it and now pushing it

Speaker 3

out to such an extent,

Speaker 2

I mean, it it has become, I think, just prudent to start looking at, well, maybe there's some simpler ways we can treat some waste here and and make progress because they have leaking tanks sitting there that are you can imagine what the state and the communities think of those tanks. The longer they sit and the the issues surrounding them. So I I think just from a prudence point of view and a the way the plant is startup has been pushed so far out, it's added a lot of new pressure to try to do something.

Speaker 5

All right. And it sounds like you're doing some testing for DOE right now?

Speaker 2

Well, not I wouldn't I wouldn't say we're we're not doing anything for DOE right now, but we're we're in the we're we've offered options to them that that they are them. So maybe that's how to best put it. We hope we will be doing something we hope we will be doing something for them in the very near future is the way to put it.

Speaker 5

Alright. Thank you very much. Okay.

Speaker 0

Thank you. If there no further questions, I'd like to turn the floor back over to management for any closing remarks.

Speaker 2

Once again, I'd like to thank everybody for participating in our fourth quarter call. We have another quarter under our belts and nearly doubled our adjusted EBITDA for the year. I can say confidently we've turned the corner. We're pursuing several large contracts in the Service segment, which we hope to announce in the near future, and we see a number of growing opportunities within the treatment segment. Very excited about our prospect for the medical subsidiary based on the interest we received from industry and now finalizing our plans for FDA and look forward to providing additional updates in the near future.

I'd like to thank you all for

Speaker 0

attending. Thank you. This concludes today's conference. Thank you for your participation, and you may disconnect your lines at

Speaker 4

this time.